Penalties And Liquidated Damages In A Changing World: Rethinking The Common Law Position

Abstract

Why did Antonio agree to give Shylock a pound of his flesh in the
Merchant of Venice? Why was Shylock unable to get his pound of
flesh? Parties to a contract are allowed to determine their obligations but
cannot freely determine the consequences of breach in the event of nonperformance. Such is the paradox in the law of obligations. Virtually every
modern contract contains a liquidated damages clause and common law
jurisdictions strive to ensure that such clauses do not offend the rule
against penalties. This paper examines the principle of contractual freedom
within the narrower context of liquidated damages and penalty clauses.
It revisits the principles of the law of penalties as expounded in the classic
case of Dunlop Pneumatic Tyre Co. Ltd v. New Garage & Motor Co.
Ltd, and considers how well they have fared after a century. In making
this evaluation, particular attention is paid to English, Australian and
Nigerian law. There are issues thrown up by the rigid dichotomy between
liquidated damages and penalties and the extent to which commercial
partners can negotiate around them. As commercial contracts become
more complex and multi-jurisdictional, clarity, certainty and security of
transactions have become more fundamental to commercial dealings. This
article finds that the dichotomy between penalty and liquidated damages
has not only become irrelevant, it also undermines these fundamentals.
Arguments made in favour of the dichotomy are self-defeating and
confusing. Judicial attempts to bring the penalty rule in consonance with
commercial realities also come with problems of their own. Therefore,
an abolition of the dichotomy is advocated. This article proposes that in
place of the existing unjustifiable paternalistic approach, all agreed damages should be prima facie valid, subject to clear cases of unequal
bargaining power and economic oppression.